How the RBI repo rate reaches your home-loan EMI

Every couple of months the Reserve Bank of India’s Monetary Policy Committee (MPC) announces whether it is raising, cutting or holding the repo rate. Within hours, headlines ask: “Will your EMI go down?” Here is how that actually works.

Step 1: What the repo rate is

The repo rate is the interest rate at which the RBI lends money to banks for very short periods, against government securities as collateral. When it is cheaper for banks to borrow, they can afford to lend more cheaply; when it is costlier, loan rates tend to rise.

The current repo rate is [placeholder — check the latest RBI policy statement]. We don’t hard-code it here because it changes at policy meetings.

Step 2: How your loan is linked to it

What happens next depends on which benchmark your loan is tied to.

External benchmark (EBLR / RLLR). Since October 2019, banks have been required to link new floating-rate loans to individuals and small businesses to an external benchmark — most choose the RBI repo rate. Your rate is:

Repo rate + bank’s spread = your loan rate

When the repo rate moves, your rate moves by the same amount at the next reset date — which must happen at least once every three months.

MCLR (Marginal Cost of Funds based Lending Rate). Older loans (roughly 2016–2019) are often linked to the bank’s own MCLR. MCLR depends on the bank’s cost of funds, so it responds to repo changes more slowly and often only partly. Resets may be every six months or a year.

Base rate / BPLR. Very old loans may still be on these legacy benchmarks, which move even more slowly. Borrowers on them should ask their bank about switching to a repo-linked rate.

Step 3: EMI change or tenure change?

When your rate falls or rises, banks usually do one of two things:

• Change the tenure, keep the EMI. Common when rates rise — your EMI stays the same but you pay for more months.
• Change the EMI, keep the tenure. Your monthly outgo changes; the end date stays the same.

RBI guidance asks lenders to explain these choices clearly and to give borrowers options at reset, including switching to a fixed rate where offered. If rates have risen and your tenure has quietly stretched, it’s worth asking your bank to raise the EMI instead — it saves a lot of interest over the life of the loan.

A worked example

Take a ₹40 lakh home loan for 20 years. Let’s assume an interest rate of 8.5%:

• At 8.5%, the EMI is about ₹34,700.
• If the rate falls by 0.25 percentage points to 8.25%, the EMI falls to about ₹34,100 — roughly ₹600 a month.
• Over the full tenure, that small-looking change adds up to well over ₹1 lakh in interest.

(The rates here are assumptions for illustration only. Try your own numbers in our loan EMI calculator.)

What it means for savers

The same chain works in reverse for deposits. Repo cuts tend to push fixed-deposit rates down over the following months; repo hikes tend to lift them. If you expect rates to fall, locking in a longer FD at today’s rate can make sense — though no one can predict rate moves with certainty.

Three things to check after a policy announcement

1. Your benchmark — repo-linked, MCLR or older? (It’s on your sanction letter or loan statement.)
2. Your reset date — when will the change actually apply?
3. EMI or tenure — which did the bank adjust, and is that what you want?

This explainer is educational and does not constitute financial advice.